This week marks the one year anniversary of when hedge fund manager Bill Ackman publicly declared that he’s shorting Herbalife, a multi-level marketing company that sells nutritional supplements and weightloss shakes.
In late December 2012, Ackman, who runs Pershing Square Capital, gave a 342-slide presentation detailing why he believes Herbalife is a “pyramid scheme” that targets lower income individuals, particularly from the Hispanic population.
At that special Sohn Conference, Ackman revealed that he was short $US1 billion worth of the the stock with a price target of $US0. He said that regulators, specifically the Federal Trade Commission, would be induced to investigate and shut the company down.
After Ackman revealed his massive short, a number of hedge fund managers, most notably Ackman’s long-time rival Carl Icahn, piled on by going long the stock.
Other fund managers who are long the stock include George Soros and Richard Perry. Stanley Druckenmiller and Kyle Bass recently disclosed long positions in Herbalife. Daniel Loeb of Third Point was briefly long Herbalife during the first quarter and exited for a $50 million profit. Bill Stiritz, the CEO/chairman of food company Post Holdings, is the largest individual shareholder of Herbalife.
So far, the market hasn’t agreed with Ackman’s short.
Since December 18, 2012, the trading session before Ackman publicly confirmed his short, shares of risen more than 76 per cent. And ever since December 20, 2012, the date of the special Sohn Conference where he shared his massive short thesis, shares of Herbalife have skyrocketed 122 per cent. Shares are up more than 132 per cent year-to-date.
Ackman is known for being mostly a long-only/value investor who has large positions in a handful of stocks. He rarely ever shorts. Even with Herbalife and his JCPenney disaster from earlier this year, he’s up about 10% this year Reuters recently reported.
In early October, Ackman said in a letter to investors that he repositioned his $US1 billion short by swapping more than 40 per cent of the equity short position for put options in an effort to reduce risk.
In late November, Ackman estimated that he had about $US400 to $US500 million in mark-to-market losses. Shares of Herbalife have climbed more than 4 per cent higher since then. Despite those losses, he has said he will take this short “to the end of the earth.”
The most recent blow to Ackman came yesterday when PriceWaterhouseCoopers put their seal of approval on the company’s financials during a re-audit. Earlier this year, Herbalife’s former auditor KPMG resigned after it was revealed one of their partners had leaked non-public information to a third party. Investors were waiting for the re-audit to come out.
Shares of Herbalife surged on that news yesterday when PwC found nothing wrong.
Despite that setback on his trade, Ackman made it clear that he still believes the company is a pyramid scheme that regulators will investigate.
“It is not the role of Herbalife’s auditor to determine if the company is a pyramid scheme. Rather, that determination depends on whether distributors earn more from recruiting new distributors than from retail sales to consumers who are not distributors. The few Herbalife distributors that make money earn the vast majority of their profits from recruiting. Herbalife is a pyramid scheme that will be shut down by regulators,” Ackman said in a release.